After a Hurricane: Can the Property Manager Be Blamed for a Lessee's Losses?

Breach of Contract

Kmart alleged in its brief to the U.S. District Court for the District of New Hampshire that the damage it suffered in the flooding was “proximately caused by Windalier, K.G.I. and Keypoint's breach of their duties” under the contract between Windalier and Kmart.” However, all parties agreed that K.G.I. and Keypoint were not parties to the lease between Kmart and Windalier. Thus, the court found that Kmart's breach of contract claims against K.G.I. and Keypoint must fail as a matter of law.

Realizing that a contract between Kmart and its landlord was not one between it and the landlord's property management firms, the plaintiff pivoted a bit, theorizing that Kmart was a third-party beneficiary of the property management agreements between Windalier and its two property managers. Under their agreements with Windalier, the property managers had promised to “continually operate and manage the Property consistent with good, sound, and prudent management practices and consistent with standards of comparable properties in the same area.”

The court, however, refused to entertain this argument because it was raised too late in the game. Stated Judge Joseph Normande LaPlante: “Kmart has premised its [third-party beneficiary] claim on a breach of the Kmart-Windalier agreement. Nowhere in the Complaint does Kmart raise or reference the property management contracts. Kmart has not sought to amend its Complaint to reflect this new theory of the case, and now — with trial looming on the horizon — is too late to do so.” Even still, Judge LaPlante went on to discuss what the outcome would have been had Kmart's third-party beneficiary theory been timely made: Kmart would still have lost its claim.

In order to be deemed a third-party beneficiary of a contract in New Hampshire, a plaintiff must establish either: 1) that the contract calls for the promisor to perform a duty that will satisfy an obligation owed by the promisee to the third party; or 2) that the contract terms inform the promisor that one of the motivations of the contract is to benefit the third party. Further, under Brooks v. Trustees of Dartmouth Coll., 161 N.H. 685, 697, 20 A.3d 890 (2011), New Hampshire's highest court has stated, “[I]t is not enough that the contract manifests the parties' intention to confer upon a third party the benefit of the promised performance. Rather, the contract must show that the parties considered the third party's legal status and intended to confer upon him a right to sue the promisor.” According to Brooks, unless there is a clear manifestation that the parties to a contract intended to confer a right to sue on a third party, that third party is only an “incidental beneficiary” of the contract and has no standing to sue for any breach of the contract.

In Sears and Kmart, the property managers' promise to “continually operate and manage the Property consistent with good, sound, and prudent management practices and consistent with standards of comparable properties in the same area” did not qualify as language demonstrating that the parties to the management contracts intended to confer a direct benefit on Kmart or to grant Kmart the right to sue based upon breach of those agreements.

In addition, other passages in the agreements between Windalier and the two property management companies affirmatively showed that the property managers were expected to act for the benefit of the landlord, and not the tenant. For example, the property managers were required by the contracts to maintain general liability insurance to cover any harm from their acts or omissions, and to name Windalier as an additional insured. These contracts also provided that, except as stated elsewhere within them, “everything done by [the property manager] under this Agreement shall be done on [Windalier's] behalf, and all obligations or expenses incurred pursuant to this Agreement shall be for the account of, and at the expense of” Windalier.

For all the above reasons, the court summarily dismissed Kmart's contract breach claims against the two property management companies, while permitting the breach of contract claim against landlord Windalier to go forward. (The court also observed in a footnote that even if Kmart could have proven it was an intended beneficiary of the property management contract in force at the time of the hurricane, it certainly could not have done so concerning the K.G.I. property-management contract that had terminated a month previous to the hurricane.)

Negligence

The court, citing to Estate of Joshua T. v. State, 150 N.H. 405 (2003), observed that, to state a claim of negligence against the property management companies, Kmart would be required under New Hampshire law to show that the property management companies: 1) owed Kmart a duty; 2) breached that duty; and 3) that their breach of duty was the proximate cause of Kmart's injuries.

Kmart's claims alleged that the contracts among the landlord, tenant and management parties gave rise to a duty on the part of the landlord and management companies “to operate, manage, maintain, inspect, control, repair and replace the Kmart Building, underground utility installations, storm sewers, Landlord Common Areas, and parking areas with reasonable care and to otherwise ensure that the Kmart Building was not subject to damages that could be avoided with the exercise of reasonable care.” However, when a contract is the basis for a relationship, New Hampshire law, like that of other jurisdictions, limits the duties that arise thereunder to the parties in privity of contract with one another. Sisson v. Jankowski, 148 N.H. 503 (2002). Without privity between Kmart and the management companies, Kmart could not therefore prove that any duties were owed to it in the normal way.

Seeking to overcome this problem, Kmart cited to the 2012 New Hampshire Supreme Court decision in Mbahaba v. Morgan, 163 N.H. 561 (N.H. 2012). There, the State's high court held that “a party without a direct contractual duty who nonetheless possesses the knowledge and authority of a landlord may be held liable for his own negligence.” Mbahaba itself relied on Sargent v. Ross, 113 N.H. 388 (N.H. 1973), the New Hampshire Supreme Court case in which the previously valid doctrine of landlord non-liability in tort was curtailed, instead allowing landlords to be held responsible in tort if an injury occurred: 1) because of a hidden danger in the property that the landlord, but not the tenant, was aware of; 2) On property leased for public use; 3) In an area of the property retained under the landlord's control, such as a common area; or 4) Because something on the premises was negligently repaired by the landlord.

That Mbahaba case, however, concerned a property manager with knowledge of lead paint in a residential rental home and a child who ingested the paint. The issue in that case was primarily one of the property manager's superior knowledge, and the fact that the landlord was renting out a known dangerous property (exception #1 to landlord non-liability in Sargent). In the Sears and Kmart case, however, Kmart was a sophisticated commercial tenant and was as aware that the nearby rivers could flood, as were the landlord and property managers.

None of the other Sargent exceptions was applicable in the case of rising flood waters, either. Thus, the court found Mbahaba inapplicable and concluded that because Kmart had not identified any contractual or common law duty owed to it by the property managers, the property management defendants' motions for summary judgment on the negligence claims must be granted.

Conclusion

Hurricane Irene flooded the Kmart store, and the property managers in charge of the leased premises cannot be held liable. Had Kmart's injuries been more attributable to the landlord's and property managers' actions — if, for instance, an obviously rotten tree in an area maintained by the landlord (through its property managers) had not been removed and the tree pierced the roof of the Kmart store when Hurricane Irene blew through — the outcome in Sears and Kmart would likely have been quite different. But since responsibility for floodwater damage control was not contemplated by the lease agreement, and nothing in the Sargent exceptions to landlord non-liability applied, the property managers had no legal responsibility for Kmart's losses under New Hampshire law.

Across the country, stories like this will play out over the coming years as landlords, insurers, tenants and property managers seek to recover their losses and/or minimize their own legal responsibility for damage caused by this year's hurricanes. Lease agreements, property management contracts and state laws will be pored over and analyzed once more. Going forward, in places where natural disasters are likely — which is just about everywhere — landlords and tenants should be reminded by this year's events to consider what happens when hurricane, flood, blizzard, earthquake or tornado damage occurs. The time to address the issues of who will bear the costs of clean-up, repair and lost business in these situations is ideally during lease negotiations.

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Janice G. Inman is Editor-in-Chief of Commercial Leasing Law & Strategy.